INVESTOR:  Following MBOs, investors will seek to identify other companies whose share price may be undervalued.

Recent economic data pertaining to the US economy continues to support the view that economic growth is likely to be quite healthy during 2002. This has been reflected in a somewhat better tone to corporate financial reports, as a tentative recovery in corporate profits seems to be emerging.

However, share prices have not really responded to this more positive economic environment and seem to be stuck in a narrow trading range.

A key factor holding back share prices would seem to be continued deep anxiety amongst investors regarding the accounting standards applied to the reporting of company financial results. To put it succinctly, investors are unsure as to whether corporate balance sheet statements and profit & loss accounts are providing a true picture of the underlying health of corporate America.

This controversy regarding accounting policies has led credit ratings agency Standard & Poor's (S&P) to start producing an analysis of corporate financial statements making adjustments on a standard basis across all companies.

Two areas that S&P identify as being capable of creating significant distortions include the treatment of pension liabilities and the "true" cost of issuing share options to senior executives.

S&P estimates show that many large US blue-chip companies are underestimating the true cost of their long-term pension liabilities. Regarding share options, there is a lively debate as to how to estimate the costs of such options and how to account for this cost.

The cost of share options only materialises when options are exercised, leading to dilution of the existing shareholders' interest in the respective company. S&P argues that companies should estimate this cost and account for it on an ongoing basis.

With share options forming such a large proportion of executives remuneration in the United States, the costs of option schemes are in fact enormous.

Adjusting for the estimated cost of share option schemes and the underestimation of pension liabilities (as well as other adjustments for write-offs e.t.c.) leads to a sharp reduction in the estimated corporate profitability of quoted US stocks.

The scale of the impact that these adjustments has can be gleaned from a comparison of the current price-earnings ratio (PER) on the S&P500 index with the PER derived from the adjusted profits discussed above.

The US market is currently trading on a PER of about 22 times earnings. If S&P adjustments were applied across the board, aggregate earnings would be much lower and, therefore, the "adjusted" PER could rise to as high as 30 times earnings.

In other words, US share prices could be even more highly valued than appears to be the case on the basis of published earnings.

For companies quoted on the Irish market the application of similar adjustments would probably only have a modest impact on profits.

While most quoted companies do have share option schemes in place, the scale of such schemes is more modest than those in the United States.

But the situation regarding pension liabilities could be problematic for some companies. However, the majority of Irish companies have well-funded pension schemes.

The costs of running these schemes is likely to increase but the impact on profitability would only become material if equity markets were to remain weak for a prolonged period. On balance, therefore, the "quality" of reported profits in the Irish market is probably quite good in an international context.

This could be one factor that has acted to increase the interest amongst some management groups to seek to bring their companies back into private ownership.

A stream of good quality future earnings is normally a prerequisite for most management buyouts, where there is usually a heavy reliance on debt finance.

After the demerger and sale of Eircell, Eircom was quickly taken into private ownership and now Smurfit and Green Property could well go the same route.

This is probably causing some concerns about the long-term viability of the Irish Stock Exchange, although the benefits of a public listing remain significant and for many companies a public listing will remain a prerequisite for their ongoing growth.

It is more likely that management buyouts will be confined to some specific situations and the main implication for investors in Irish stocks is positive.

Such activity will obviously push up the share prices of the individual target companies. It will also have a spillover effect as investors seek to identify other companies whose share price may be undervalued.

Therefore, this recent spate of buy-out activity is likely to underpin current price levels in the Irish market.